# articles

## exit strategy - Matt Levine

### Bid/ask

If you are a private tech startup and your valuation has gone down, three things are probably true:

1. Your valuation has gone down in a somewhat opaque way. It's not like your stock traded on the stock exchange at $100 a year ago and at $50 today; your stock doesn't trade on the stock exchange. Maybe there are some secondary transactions that are not quite representative, maybe [Fidelity marked down](https://techcrunch.com/2024/01/02/fidelity-marks-down-x-to-almost-a-third-of-the-investment-price/) its position, maybe you did a fundraising round at a 20% lower price but with some [structure](https://www.bloomberg.com/opinion/articles/2023-01-04/private-markets-don-t-like-to-go-down) that prevented the decline from being steeper. The decline in value is a bit fuzzy.
2. Even assuming that your latest market value is knowable, _you_ probably think you're worth more: You are an optimistic tech founder, you are changing the world, this is a temporary blip, you will do an initial public offering in a year or two at 10 times today's obviously wrong valuation.
3. Assuming that your latest market value is knowable, _prospective employees_ probably think you're worth less: Tech startup employees want to get on a rocket ship; they want stock worth $100 now that will be worth $1,000 at your IPO. Declining stock values are bad; they suggest that there's no rocket ship.

This makes it very hard to pay new employees in stock: You will be miserable giving up stock at these low valuations, while the employees won't be all that excited about getting it. The bid/ask spread is too wide to strike a deal. The [Financial Times reports](https://www.ft.com/content/cc125457-5f2d-457e-8f6b-0bc3d686daf5):

> Technology start-ups have slashed equity packages for new hires as they weather a prolonged downturn, according to new data from San Francisco-based software company Carta.
> 
> People going to work at start-ups are receiving 37 per cent less equity in their companies on average compared with 18 months ago, the figures showed. Average salaries have barely changed during that time, shrinking by 0.2 per cent since November 2022. …
> 
> "Companies are being very conservative in how they think about managing both cash and equity in an uncertain market," said Tom Keiser, chief operating officer of Carta.
> 
> He said start-ups were holding back shares to help raise more funds once market conditions improved, but added that workers had also contributed to the shift in compensation.
> 
> "Another part of it is that employees no longer believe in trading hours or compensation for equity because they do not believe the market is there the way it was before to generate wealth," he said. "HR departments are looking at what employees really value and they value cash more right now than they do equity."

When the stock is cheap, it is harder than ever for startups to part with it, and easier than ever for employees to pass it up.

### Destiny

A not uncommon situation is: You are an employee of a hot tech startup, you own stock in your startup, but you can't sell it. One reason that you might not be able to sell it is that the company isn't public yet, so the shares aren't listed on the stock exchange and there is no easy way to sell them. But that problem can be overcome: People want to buy the stocks of hot private startups, there are online marketplaces and brokers looking for shares, and probably with a bit of effort you could find a buyer.

The other reason that you might not be able to sell your stock is that the company doesn't let you. It is pretty common for hot private tech startups to limit the sale of their stock: The company might have transfer restrictions ("you can't sell your stock without our permission"), or a right of first refusal (ROFR, "you can't sell your stock unless you first offer to sell it back to us at the same price"), or both. Of course these transfer restrictions will go away when the company goes public, but you don't know when that will be, and it could be a long wait. [[1]](imap://dave%40stucky%2Etech@mail.stucky.tech:993/fetch%3EUID%3E.INBOX%3E4839#footnote-1)  And so even if you find a buyer, you can't sell to her without going to the company for permission. And the company might well say no: Those restrictions exist so that the company can control its shareholder base, and it doesn't want just anyone to own its stock. It wants you to own the stock.

But you might prefer money: Perhaps your startup has been private for a long time, its valuation is high, you'd like a new house, and you'd like to cash out a bit now. Often, these days, mature private tech startups recognize this problem and periodically [buy back stock](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuYmxvb21iZXJnLmNvbS9vcGluaW9uL2FydGljbGVzLzIwMjMtMTItMDcvb3BlbmFpLXdhcy1wcmV0dHktcG9ydGFibGU_Y21waWQ9QkJEMDQwODI0X01PTkVZU1RVRkYmdXRtX21lZGl1bT1lbWFpbCZ1dG1fc291cmNlPW5ld3NsZXR0ZXImdXRtX3Rlcm09MjQwNDA4JnV0bV9jYW1wYWlnbj1tb25leXN0dWZm/60e87ce39a995a4b1a2deb96B2dd327a6) from employees. But perhaps your company doesn't do that, or it doesn't do it at the size or price you want, or it's between buybacks and you want money now. 

Meanwhile lots of people want your stock: It's a hot startup and there's plenty of demand. You'd think there'd be a trade. The trade is:

- A buyer comes to you and says "I really want your stock and I'll give you $50 per share."
- You say "that sounds great, but there are transfer restrictions and I can't sell until we go public."
- The buyer says: "Sure, sure, but stock is just a promise of future cash flows anyway; it's not like I need the stock certificate today. I just want to pay today's _price_ for the stock, because I think it will go up_._ Tell you what: I'll give you $50 today, and when the company _does_ go public, _then_ you give me the shares." [[2]](imap://dave%40stucky%2Etech@mail.stucky.tech:993/fetch%3EUID%3E.INBOX%3E4839#footnote-2)
- You say "sure," she gives you the $50, and you write a little contract saying "IOU: startup shares."
- Two years later (or whenever), the company goes public, [[3]](imap://dave%40stucky%2Etech@mail.stucky.tech:993/fetch%3EUID%3E.INBOX%3E4839#footnote-3)  the transfer restrictions lift, you get your shares, and you deliver them to her. If the stock is at $400, you feel a twinge of regret: You're giving her stock worth $400 today, and all you got was $50 two years ago. 

This is called a "[forward contract](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly9tZWRpdW0uY29tL0Bqb25hdGhhbi5sb25zZGFsZS90aGUtbWFueS1wcm9ibGVtcy13aXRoLWZvcndhcmQtcHVyY2hhc2UtY29udHJhY3RzLTQ4ODg1NWM2OWU0Mg/60e87ce39a995a4b1a2deb96B510253e8)." [[4]](imap://dave%40stucky%2Etech@mail.stucky.tech:993/fetch%3EUID%3E.INBOX%3E4839#footnote-4)  There are some risks:

1. If your company has transfer restrictions, they _probably cover forward contracts_. They won't say "you can't sell your stock"; they will say something more complicated like "you can't sell, pledge, assign, agree to sell, enter a derivative contract to sell, etc., etc." your stock. The point of a forward contract is not that it is _allowed_ by your company; the point is that you can sign the contract now, and deliver the stock later, without your company _knowing about it_.
2. But say that the company goes public at $400 per share, two years after you did the forward contract. You have all this stock worth $400 per share. The buyer comes to you and says "hey, remember me? We had a contract? I paid you $50 per share for your stock? I'd like the stock now." You feel a twinge of regret, but might you also feel a twinge of … amnesia? Litigiousness? "I don't remember any contract," you might tell the buyer. "I'm pretty sure it's invalid anyway," you might add, "because the company's transfer restrictions cover forward contracts. See you in court!"
3. Say that the company goes public at $400 per share. The _company_ now has all this extra cash, and this valuable stock. The _company_ gets wind of your forward contract. It calls you and/or the buyer and says "hey, it seems like you agreed to trade this stock at $50 two years ago. Well, we had a right of first refusal, and we are now exercising it, so you have to sell _us_ the stock. Today, for $50." Your buyer — who paid $50 two years ago as a bet that the company would be far more valuable when it went public, and was right — now has to give the stock back and get back only her $50.

One more point about forward contracts. A forward contract is, in essence, a placeholder for stock, an empty box that will one day hold a share of stock of the underlying startup. The buyer paid money for it, because it is desirable. She can _sell_ it, too. If she no longer likes the company, or if the company's valuation has gone up and she wants to take profits, there's probably some _other_ investor who wants exposure to a hot startup and who will pay her $60 or whatever for that forward. Maybe that investor will turn around and sell it, too. In two years, when your company goes public, you might get a call from a total stranger saying "hey, you don't know me, but I bought a forward from someone who bought it from someone who bought it from someone who bought it from someone who bought it from you, so please send me the stock." Your twinge of amnesia might be strong.

At the New York Times last Friday, [Erin Griffith had a fun article](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cubnl0aW1lcy5jb20vMjAyNC8wNC8wNS90ZWNobm9sb2d5L2ludmVzdC1wcml2YXRlLXRlY2gtb3BlbmFpLXNwYWNleC5odG1s/60e87ce39a995a4b1a2deb96Bc7be8ed4) about Destiny Tech100, a publicly traded closed-end fund that invests in private tech startups:

> It is offering a publicly traded fund that contains shares of 23 private tech companies including Stripe, SpaceX, OpenAI, Discord and Epic Games. The fund, which began trading on the New York Stock Exchange last week, plans to expand its holdings to include stock in 100 start-ups.
> 
> Sohail Prasad, the chief executive of Destiny XYZ, the parent company of the fund, said his goal was to let anyone own part of the tech industry's top private companies. …
> 
> Mr. Prasad and a team of five deal makers have used their relationships to get access to the start-up shares that Destiny has bought so far. Private companies can be picky about whom they let own their shares. But as they stay private for longer, their employees and early investors can become antsy to cash out. The most valuable companies have held regular "tender offers" that allow employees to sell their shares, which is one way Destiny Tech100 buys stock.

It is a fascinating model: It trades publicly on the New York Stock Exchange (under the ticker DXYZ), but its investments are private and illiquid. It [computes its net asset value quarterly](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuc2VjLmdvdi9BcmNoaXZlcy9lZGdhci9kYXRhLzE4NDM5NzQvMDAwMTU3NTg3MjIzMDAxOTI0L2VzMDg2XzQyNGIzLmh0bSNwcm9fMTA/60e87ce39a995a4b1a2deb96B5e1f597a), and its [most recent computation](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuc2VjLmdvdi9BcmNoaXZlcy9lZGdhci9kYXRhLzE4NDM5NzQvMDAwMTE0NTU0OTI0MDE1OTk0L3hzbEZvcm1OLUNFTl9YMDEvcHJpbWFyeV9kb2MueG1s/60e87ce39a995a4b1a2deb96B055407f6) lists its net asset value per share at $4.84. It [went public last month](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuc2VjLmdvdi9BcmNoaXZlcy9lZGdhci9kYXRhLzE4NDM5NzQvMDAwMTU3NTg3MjI0MDAwMjg3L2VzMTA1XzQ5N2FkLmh0bQ/60e87ce39a995a4b1a2deb96B7054b46c) with a reference price of $4.84, but started trading at $8.25 and went up from there; it closed on Friday at $59.20, and it was trading around $80 at noon today. It has a net asset value — its computation of the fair value of its underlying startup stakes — of about [$54 million](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuc2VjLmdvdi9BcmNoaXZlcy9lZGdhci9kYXRhLzE4NDM5NzQvMDAwMTE0NTU0OTI0MDE1OTk0L3hzbEZvcm1OLUNFTl9YMDEvcHJpbWFyeV9kb2MueG1s/60e87ce39a995a4b1a2deb96C055407f6), and a market capitalization — the value that the market places on its shares — of about $875 million.

Somebody is wrong! One way to model this is that there is $875 million of demand from regular public investors to own shares in hot private startups, and so far only about $54 million of supply. But if each of this fund's holdings goes up 1,000% by the time they go public, people who bought into the fund today will _lose money_. Weird!

The other weird thing is, as Griffith reports:

> The fund has also bought shares in Stripe and Plaid, a financial technology provider, through "forward contracts." In these agreements, start-up employees can get cash by agreeing to transfer their company shares to an investor when the company goes public or sells.
> 
> The contracts are controversial. Stripe has said that it forbids its current and former employees to strike such deals and that any forward contract is void. Mr. Prasad said his fund was confident the deals were legal.

Here is [Stripe's threat](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly9zdXBwb3J0LnN0cmlwZS5jb20vcXVlc3Rpb25zL3N0cmlwZS1mb3J3YXJkLWNvbnRyYWN0cy1hbmQtb3RoZXItdW5hdXRob3JpemVkLWxpcXVpZGl0eS10cmFuc2FjdGlvbnM/60e87ce39a995a4b1a2deb96B2c414b8e):

> To be clear, transactions in which a Stripe [employee] receives payment now and promises to transfer shares directly or indirectly in the future are subject to ROFRs and transfer restrictions. This means, among other things, that at the time the transaction is "closed out" Stripe is entitled to step in and repurchase the shares that are subject to the contract at the original price paid by the buyer. We intend to vigorously enforce our ROFR rights with respect to all such contracts.

To be fair, Destiny Tech100 [lists](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuc2VjLmdvdi9BcmNoaXZlcy9lZGdhci9kYXRhLzE4NDM5NzQvMDAwMTU3NTg3MjIzMDAxOTI0L2VzMDg2XzQyNGIzLmh0bSNwcm9fMDM/60e87ce39a995a4b1a2deb96B4e5b30ff) its investment in Stripe forward contracts as having a cost of about $3.5 million and a fair value (as of last June) of about $1 million: It bought into Stripe forwards at the peak, Stripe's valuation [has fallen](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuYmxvb21iZXJnLmNvbS9uZXdzL2FydGljbGVzLzIwMjMtMDMtMTcvc3RyaXBlLWZvdW5kZXJzLXNoZWQtYmlsbGlvbnMtaW4tcGFpbmZ1bC1zaGlmdC10by1sZWFuZXItdGltZXM_Y21waWQ9QkJEMDQwODI0X01PTkVZU1RVRkYmdXRtX21lZGl1bT1lbWFpbCZ1dG1fc291cmNlPW5ld3NsZXR0ZXImdXRtX3Rlcm09MjQwNDA4JnV0bV9jYW1wYWlnbj1tb25leXN0dWZm/60e87ce39a995a4b1a2deb96B1a775aba), and at this point it would be _great_ for the fund if Stripe tried to buy back its shares at the original price it paid. Still the fund's forward-related [risk factors](https://link.mail.bloombergbusiness.com/click/34967840.279823/aHR0cHM6Ly93d3cuc2VjLmdvdi9BcmNoaXZlcy9lZGdhci9kYXRhLzE4NDM5NzQvMDAwMTU3NTg3MjIzMDAxOTI0L2VzMDg2XzQyNGIzLmh0bSNwcm9fMDU/60e87ce39a995a4b1a2deb96B8deff5fd) are a fun read:

> Should counterparties breach their agreement inadvertently, by operation of law, intentionally, or fraudulently, it could affect our performance. ...
> 
> In cases where we purchase a forward contract through a secondary marketplace, we may have no direct relationship with, or right to contact, enforce rights against, or obtain personal information or contact information concerning the counterparty(ies). ...
> 
> Should the portfolio company object to the existence of the forward contract, it may take any number of steps to discourage or obstruct the transactions, including claiming that the counterparty transactions violate the portfolio company's agreements, claiming causes of action against counterparties or us, defensive measures intended to discourage counterparties from selling the portfolio company's securities to us, refusing to accept or process securities transfers, or claiming rights to rescind our transactions or trigger rights of refusal to purchase the portfolio company's securities involved in our transactions.

It seems to me that the safest way for a forward contract to work is for the company _not to know about it:_ Once it goes public, the seller just delivers the unrestricted stock and never tells the company. But once you put it in a prospectus, the company knows!

[1] There are some situations where public companies might have transfer restrictions or ROFRs on some of their shares, but generally not permanent restrictions for every employee. Employees might find themselves locked up for a few months after the initial public offering, and any new grant of shares might be restricted for some period, but eventually they'll have freely tradable stock.

[2] Realistically she'd probably pay you less than $50, to account for the risk and delay and complexity.

[3] Or the company is acquired, you get $20 per share in cash, and the forward contract requires you to pay her the $20. Or the company fails, the stock is worth $0, and the forward contract doesn't matter.

[4] Generically, a "forward contract" often means a contract in which (1) I agree to pay you $50 in a year and (2) you agree to deliver me the stock in a year. The thing in the text is a "prepaid forward contract," in which I pay you now and you deliver the stock later. But in tech-startup employee liquidity usage, a "forward contract" is normally prepaid, because you want the money now.

## fading from glory

[Steve Wozniak suffers minor stroke | Hacker News](https://news.ycombinator.com/item?id=38212992)
[Apple co-founder Steve Wozniak suffers minor stroke - BBC News](https://www.bbc.co.uk/news/technology-67366306)

## failure stories

[Trucking startup Convoy closes operations with no buyer | Hacker News](https://news.ycombinator.com/item?id=37946017)
[Convoy, Backed by Jeff Bezos and Bill Gates, Is Closing Operation With No Buyer - Bloomberg](https://www.bloomberg.com/news/articles/2023-10-19/bezos-backed-startup-convoy-closes-operations-with-no-buyer)

[Ask HN: What is the thing you've built that you regret the most? | Hacker News](https://news.ycombinator.com/item?id=33675112)

## selling stories

[The end of Airplane.dev | Hacker News](https://news.ycombinator.com/item?id=39619041)
[The end of Airplane.dev | Benjamin Yolken](https://yolken.net/blog/end-of-airplanedev)

[Inmates to Entrepreneurs](https://inmatestoentrepreneurs.org)

## why startups fail

[Triin Linamagi](https://www.fastcompany.com/3044519/7-of-the-most-common-reasons-startups-fail)
(2015) The Most Common Reasons Startups Fail

# guides

## selling the company

[Sell for half a billion and get nothing (2021) | Hacker News](https://news.ycombinator.com/item?id=39598903)
[Sell Your Startup for Half a Billion and Get Nothing](https://www.fundablestartups.com/blog/half-a-billion)

[Can a $310M startup avoid due diligence? | Hacker News](https://news.ycombinator.com/item?id=30248282)
[Can a $310M startup avoid due diligence? - SV Gossip](https://web.archive.org/web/20240114200647/https://www.svgossip.com/p/can-a-310m-startup-avoid-due-diligence)

# text

## doing things afterward

I left the music business at age 25 and retired. This was the start of a work pattern I continued all the way up to age fifty-seven: busting my butt for two or three years, burning out, and following up with a quiet period where I rest up for my next big adventure.

## giving off work

Once the entrepreneur has the company up and running, they often need to pass the baton on to the manager.
The creator's job is to find someone with expertise who understands the vision and is prepared to follow the path.
The entrepreneur's job is effectively to put themselves out of a job each time the new company is up and running.
Then they can step aside and free themselves up to be entrepreneurial in a different business.
It is generally asking for trouble for an entrepreneur to stick around for too long, trying to cover both roles.
In a small business, you can be both the entrepreneur and the manager while you are getting it going.
But you need to know and understand everything about that business. And I really mean everything.
An emerging entrepreneur should sign every cheque.
Examine every invoice, and you'll soon appreciate where your money is going.
Even in a big business like the Virgin Group, I sit down now and again and sign every single cheque that goes out, and I ask my managing directors to do the same. For a month. Sign everything for a month every six months and suddenly you're asking: 'What on earth is this for?' You'll be able to cut out unnecessary expenditure quite dramatically when you do that.
As a small-business person, you must immerse yourself 100 per cent in everything and learn about the ins and outs of every single department.
As you get bigger, you will be able to delegate, and when people come to you with their problems, they'll be surprised how knowledgeable you are and how much practical advice you can offer.
The reason you're knowledgeable is because in the early days of the business, you learned all about it.
This is how business leadership is achieved. There are no short cuts.

If you're an entrepreneur, you need to find a manager. Then you should move on, enjoy yourself and then set up your next enterprise.

## know when to quit

I was a success, which meant the challenge was over and it was time for me to move on.

I was a rich guy buoyed by the security and comfort of my wealth. I was no longer hungry or desperate, two qualities a start-up CEO needs.

## leaving a legacy

DO NOT EXPECT YOUR KIDS TO PICK UP YOUR BUSINESS
- at best, they'll take it on, but will NOT run it the way you did
- at worst, they'll run it into the ground (and you'd have saved a lot of trouble and gotten more money by outright selling it) or they'll hate you for it (and therefore make your last days depressingly meaningless)

Each time, I introduced a new business model to the industry and strove to enrich my customers' lives in some way. When my business was up and running and growing, I couldn't wait to move on and invent something else.

## mergers and acquisitions

It appears that most (business failures) become (open-source), typically as a (legacy) for others.

[We will be shutting down neeva.com | Hacker News](https://news.ycombinator.com/item?id=36013783)
[Snowflake acquires Neeva to accelerate search in the Data Cloud through generative AI - Blog](https://www.snowflake.com/blog/snowflake-acquires-neeva-to-accelerate-search-in-the-data-cloud-through-generative-ai/)
Neeva Is An Ad-free, Privacy-focused Search Engine That Uses AI Technology To Deliver More Relevant And Personalized Search Results.

## selling the company

Startups are much better bought than sold.

Even if you never plan to sell your startup, you should be collecting and reviewing the data that will ultimately allow you to facilitate an easy sale.

The eBay of website and software sales is Flippa